G20 failure drags down oil prices

Crude prices, US stock markets, and corporate energy stocks fell Nov. 12 as the Group of 20 (G20) major world economies refused to back a US effort to get China to raise the value of its currency.

Sam Fletcher
OGJ Senior Writer

Crude prices, US stock markets, and corporate energy stocks fell Nov. 12 as the Group of 20 (G20) major world economies refused to back a US effort to get China to raise the value of its currency.

“The oil market suffered a complete about-turn,” said Leon Westgate at Standard New York Securities Inc., the Standard Bank Group. “The sell-off essentially brought crude oil prices back to where it started Nov. 3, when QE2 [the US Federal Reserve Bank’s second round of quantitative easing] was formally announced. That said, “Oil has still held up better than most equity markets and the euro since the QE2 announcement.” Dollar weakness has been a key prop for oil prices this year.

The main result of the G20 summit was a vague vow to refrain from “competitive devaluation” of currencies; it has little meaning since countries usually devalue only in extreme crisis. The US wants to stop deliberate undervaluing currencies to expand exports.

US President Barack Obama chided Chinese currency policies, saying, “Because of China’s success, it’s important that it act in a responsible fashion.” Undervalued Chinese currency is “an irritant not just to the US, but…to a lot of China’s trading partners and those who are competing with China to sell goods around the world…. China spends enormous amounts of money intervening in the market to keep it undervalued.”

Of course, some G20 members see little difference between China’s currency policies and the QE2 move to buy $600 billion of Treasuries over 8 months to stimulate the US economy. That plan triggered a sharp drop in the value of the dollar and heightened inflationary fears, particularly in emerging markets such as China and Brazil.

Obama, however, claimed the rebound of the US economy—the world’s biggest—would be our most important contribution to the global recovery.

“But that’s not how big exporting economies such as Brazil see the issue. Indeed, the G20 summit highlighted yet again the different agendas of developed and emerging markets. The latter went into the summit with a new stridency, not only refusing to play ball with the US on currencies but breaking down traditional shibboleths on foreign aid,” said analysts at KBC Energy Economics under KBC Advanced Technologies PLC, Surrey, UK.

Bad start for QE2
After recently reaching 2-year highs, West Texas Intermediate dropped $2.93 to $84.88/bbl Nov. 12 on the New York Mercantile Exchange. In London, North Sea Brent lost $2.47 to $86.34/bbl. Gold prices suffered the biggest drop in 4 months on fear China might raise its interest rates over the weekend.

That date also marked “the first Fed POMO (Permanent Open Market Operation) under QE2 and for US equities that translated in the worse week in 3 months. The Standard & Poor’s 500 was down 2.17% for the week but is still up 7.54% for the year while the NASDAQ was down 2.36% for the week and is up 10.98% for the year,” said Olivier Jakob at Petromatrix in Zug, Switzerland. “The [Fed Chairman Ben] Bernanke wealth creation magic did not really work for the first week of the grand plan.”

The G20 summit was important because of the need to align international exchange rates to avoid the domino-effect of currency devaluations that occurred this summer. “The red-eye discussions in Seoul were preceded by a new wave of concern over debts racked up by European countries such as Ireland and Portugal, which have dented the euro after the currency made big—possibly excessive—gains against the dollar following Bernanke’s decision to go ahead with QE2,” said KBC analysts.

QE2 has caused “bitter divisions” within the G20. With Republican additions to the House and Senate, those legislators may now listen to anti-Keynesian economists who argue pumping more tax dollars into the economy via QE2 could eventually trigger inflation and weaken the dollar too much.

(Online Nov. 15, 2010; author’s e-mail: samf@ogjonline.com)

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